ROI (Return on Investment) is probably
most important calculation one needs to make to ensure long-term viability of their business. It is not enough to build in a profit margin on product or service being offered. One must track with proficiency amount of dollars being invested into attracting sales and how much ROI those dollars put back into business. If investment meets too little return, a product line is doomed to fail in long-term.THE BASIC ROI PERCENTAGE CALCULATION
Many experts seem to agree, “calculating an accurate return on investment (ROI) is not an easy thing to do.”
I do not intend to give you a thorough analysis of ROI calculation process. Calculating an accurate ROI is hard to do, but explaining full scope of ROI calculations in less than 1000 words is far more difficult.
As such, this article is only intended to introduce you to basic concepts behind ROI calculations. Here is a very basic equation for calculating ROI:
ROI = [(Payback - Investment)/Investment)]*100
Your payback is actually total amount of money earned from your investment in your company. Investment relates to amount of resources put into generating given payback.
You should run ROI calculations on both monthly and yearly timelines.
IMPROPER CALCULATIONS BY MANY SMALL BUSINESS OWNERS
The actual amount of investment into a business is often misunderstood by business owner. As a result, true ROI calculations for most small businesses are skewed.
Most small business owners make their mistake in this most necessary calculation, because they do not properly value their own time. Please note that when I previously defined “investment”, I stated that it relates to “amount of resources put into generating payback.”
Indeed, “resources” includes cash money. But, it also includes “human resources” or “time”.
If most small business owners would value their hours at minimum wage, and calculate their time into investment equation, they would soon realize that their small business is running in red!
Some small business owners will finally run ROI calculations including human resources, and suddenly realize that they could make more money working a job. If small business owner has been running their business for a really long time, struggling to make ends meet, they might see this calculation and close their doors once and for all.
PLEASE DON’T LET ME DISCOURAGE YOU
I do not share this revelation with you so that you will close your business down. Quite to contrary. I share this with you so that you can see big picture and start running your business in a way that will actually generate a real profit for you and your business.
